Exploring Microfinance Growth and Challenges in South Africa

1. Challenges facing the microfinance “industry” in South Africa Gerhard Coetzee 2006 MFSA Conference

2. Outline • History • Present • Future

3. Short history • Four phases • Before 1992 – from struggle to financial services • 1992 to 1999 – growth after legislative changes • 1999 to 2005 – era of growth continues in a more regulated environment (MFRC) • 2006 - onwards

4. Until 1992 • NGO dominated market • Entrepreneurial focus • Origins in struggle and non-financial NGOs • Difficult to make the change • USAID spent $20m between 1988 - 1999on mostly NGOs • Decline of the NGOs, but exception(s) • Decline of the parastatal institutions • Financial exclusion of majority, role of apartheid, distortions due to Usury Act

5. 1992 to 1999 • Key NGO’s collapse • Exemption under R6000 • Micro lenders and consumer finance • Consumer protection • Credit bureaus • Exemption lifted to R10 000 • Court case / MFRC • Exponential growth

6. 1999 to 2005 • Khula failed in it’s mandate, looses intermediaries • APEX concept, design and ….. • Land Bank failed in it’s small farmer finance mandate • MAFISA, concept, design and …. • NHFC looses intermediaries – investigate retail • General failure in development finance • Consumer Finance Growth continues • 2nd Exemption Notice, MFRC: • Formalize microlending within Exemption • Consumer protection • Improve information & understanding • More detail coming

7. Market ‘growth’ in Rand volume

8. Assessing MFRC • Formalize microlending: • ~2200 registered, % unregistered ? • Black MLs, but informal township MLs (?) • Consumer protection: • Help for borrowers, complaints & enforcement • Progress on disclosure & reckless lending (?) • Information, understanding: • Central role in sectoral data & analysis • Efforts to inform, educate public (?) • Pro-active stance: enforcement and beyond • Institutional change: NLR, legal/judicial issues, National Credit Act • Influencing policy through research: competition, housing, indebtedness

9. MFRC outcomes, impact • Major change in microlender behavior • Influx of banks: lowered reputational risk • R22+ billion market, evidence of substantial use for developmental purposes (larger volume than DFIs?) • Quantum leap in information, understanding • Reinforce regulatory approach

10. 2006 • MFRC ends • NCR starts • Challenges

11. Challenges – Development Finance(“Second economy?”) • Understanding of clients • township money lenders example • real market research • Expansion of products, expanded options • SMME finance – attacking the self employed market • Regulatory environment - heavy burden of “red tape” • Registry of security interests • Explicitly target productive uses of microfinance • Transformation of NGO MFIs • Business Development Services • Commercial banks – already in there, but more focus needed • However, many success stories, in Africa and beyond

12. Challenges – Asset accumulation • Savings, insurance, investment products (ever mentioned here?) • Targeted savings products • Mzanzi experience encouraging • Smooth consumption, raise repayment, minimize risk • Is the banks making money, threat of cannibalization • Savings Targets Not Addressed in Anticipated Legislation, Charter • Addressing negative real interest rates on savings instruments • Need for bundling lending and saving instruments. • Repayment is a combination of amortized principal, interest, forced saving • Banco Sol model • Accion model • Village Banking Model • Housing: embryonic township markets • Investment products

13. African examples  • National Microfinance Bank – Tanzania  • Amhara Credit and Savings Institution – Ethiopia  • Banque du Caire – Egypt  • K-Rep – Kenya  • Equity Bank – Kenya  • CERUDEB – Uganda  • Novo Banco - Mozambique  • Novo Banco - Angola 

14. Other countries  • BRI Unit Desa - Indonesia • Banco do Nordeste – Brazil • People’s Bank of Sri Lanka • Banrural – Guatemala • Bank Pertanian Malasia Agricultural Development • Kyrgyz Agricultral Finance Cooperation – Kyrgyzstan • Land Bank, Development Bank, National Bank – Philippine • BancoSol – Bolivia • 14 other banks in Eastern Europe • Grameen Bank - Bangladesh

15. Challenge – Rules and enforcement • NCR • Other rules • Harmonisation of policy and legislation? • Main challenge – enforcement?

16. Challenge – Information • Need for even better data and information • Better credit scoring and pricing models • Having better information on individuals, households and firms applying for / using credit for policy development • Training and capacity building • Major need, no recognition, not willing to pay • Short sighted – need to invest in most strategic asset • Consumer education • Need for improved outreach • Focus on lower income strata • Distinct lack of innovation • Use of CE as a monitoring tool • Pricing issues, competition, monitoring

17. Short term price comparisons

18. Longer term price comparisons